Undergraduate Economics Association 9/18/2012
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Transcript of Undergraduate Economics Association 9/18/2012
Undergraduate Economics Association9/18/2012
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European Union in Crisis
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Problems with Big Governments
The following views and opinions do not represent the BU UEA and the perspectives of its members.
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The Definition of ‘The State’
Max Weber:
A state has a 'monopoly of the legitimate use of physical force in the enforcement of order.‘
Politics as a Vocation
Douglass North & John Wallis1) The state organizes other
organizations.2) States support private
ordering of relationships.
Defining the State
John A. Hall & G. J. Ikenberry
1) Set of institutions manned by own personnel.
2) Center of Territory.3) Monopolizes rule making.
The State
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Brief History of the State
• First real recognizable state: Mesopotamia, 3000 BCHow the State Formed:
• Marxists and Leninists claim ‘The State’ was created to enforce social classes.
• Oppenheimer claimed military conquests on settled agricultural population.
Other Theories:
• Ecological: Farmers tied to the land close to rivers. Easy prey for coercion.
• Religious: Coercion accepted because it was for the divine.Responded to demands from supernatural.
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The Problems of Big Government1)Money2)Continuous Intervention3)Soaring Debt!4)Business Cycles5)Collective Corruption
"If a government were put in charge of the Sahara Desert, within five years they’d have a shortage of sand." - Milton Friedman, PhD, Nobel Laureate
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Money
InflationClassical Definition: The Increase in the Money Supply
Contemporary: Increase in the general price level of a basket of goods in the country over a specific time.
Examples: Song Dynasty (Jiaozie) Continental Congress (around 1781) Stockholm Banco.
Gresham’s Law“Bad Money Drives out Good Money”
OR“Money overvalued artificially by government will drive out of circulation artificially undervalued money” – M. Rothbard (What Has Government Done to Our Money)
Provided by St. Louis Fed: research.stlouisfed.org
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Money
Purchasing Power
• Since the inception of the FED in 1913, the purchasing power has been constantly falling.
• H. Hazlitt – The Inflation Crisis and How to Resolve it.
Provided by ObservationandNotes
S1
S2
D1
Value
Quantity
• Increasing money supply puts more money in the economy and decreases the value of it.
• Savings decrease in value. This is a hidden tax on the poor.
• “Governments never learn. Only people learn.” – M. Friedman
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Continuous Intervention
Once you control one thing, you must control the other.
• When government intervenes in the economy, it has unintended consequences.
• These are understood too late, and it involves more intervention.
• Until the economy is considerably under government control or socialism.
Government finds milk important.Government imposes maximum price on milk.
Milk producers make fewer profits.They leave to produce other things.Milk production falls.
Government tries to control factors of production. Imposes price control on them.
Producers of Factors of production make fewer profits.They leave. Milk production and factors of production are low.
The Trend Continues
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Soaring Debt!
US Debt:$16, 425, 816, 500, 262
• Debt has increased magnanimously over the past 20 years.
• Eventually, debt has to be redeemed.
• Around $10 trillion of the debt is owned by China!
• When the debt must be redeemed then there will be panic and instability.
• Onward to BU Economist:Lawrence Kotlikoff
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Soaring Debt!Laurence Kotlikoff:
“The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.”
• Writer of Jimmy Stewart is Dead: Ending the World’s Ongoing Plague with Limited Purpose Banking.
• Debt actually stands at $202 trillion!!!• For the gap to be closed you must “double our
taxes”…….permanently.• Entitlements to baby boomers will have to be paid. • “The annual cost of these entitlements will total
about $4 trillion in today’s dollars.”
Ending Scenario:• Countries notice that the debt will never be paid.
Debt will be called in.• Interest rates for government bonds will rise.• Taxes will have to rise rapidly to pay for debts.• Money will have to be printed to keep everything
going.“And we all fall down…”
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Soaring Debt!Limited Purpose Banking (LPB):
• Banks should do what they were created to do…Store money and financial intermediation.
• Banks would utilize mutual funds.• People would come and choose where
their savings would go and what risk to accumulate.
• Banks do not hold ‘any financial assets and they’d borrow except to finance their mutual funds operations.’
• Federal Financial Authority (FFA) would ‘rate, verify, supervise custody, disclose and clear all securities purchase, held and sold by LPB mutual funds.’
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Business Cycles
Richard Cantillon(1680 – 1734)
Ludwig von Mises(1881-1973)
F.A. Hayek(1899-1992)
Murray Rothbard(1926-1995)
What Causes Business Cycles?
• Economic theory states that prices should equilibrate. Then why do prices suddenly fall dramatically and violently?
• Are markets susceptible to the risk of continuous failure? Is capitalism good, but a deadly force as well?
• Is government the problem? Or is ‘irrational exuberance’ a worry? • Minimalist government theorists propose a theory: Austrian Theory of the Business Cycle.
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Business CyclesAustrian Theory of the Business Cycle:
• Ludwig von Mises noted his discontent against the quantity theory of money.
• Once Government increases the money supply to improve the economy, three stages take place.
• 1st Stage: Money supply rises faster than the increase in price. People are not scared.
• 2nd Stage: People are starting to get anxious as they notice the inflation seems to be continuing. Fears of never ending inflation are taking place.
• 3rd Stage: Everyone notices that the amount of money keeps rising indefinitely. People panic and try to exchange for goods and services.
The Economy Goes Bust!
Quantity theory of moneyConfounded?
1st Stage: mv > pt
2nd Stage: mv = pt
3rd Stage: mv < pt
Example: Germany Hyperinflation.
S1
Quantity
D1
Value
D2
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Hayekian Triangles:• The Keynes and Hayek debate was the
pinnacle of economics in the 20th century.
• Hayek devised the triangles to explain the ‘structure of the economy’ and ‘consumption’. (1)
• Why do people save? To consume in the future!
• When entrepreneurs see interest rates fall, they think that people are saving more.
• They invest more, and the stages of production rise. (2)
• Thus, when people start to spend, the entrepreneurs are ready!
What happens when there is credit expansion?
Business Cycles
Stages of Production
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Business Cycles
Credit Expansion:• When the FED artificially stimulates the
economy, then…. Investors think that people are saving
and try to invest in capital. Consumers see interest rates are low
and start to spend. (‘Get Rich Schemes’ – M. Rothbard)
• The economy goes through unsustainable growth and a bubble is created.
• Investors do not have enough resources to invest.
• Eventually, everyone notices that consumption doesn’t rise to predicted amounts. The bubble bursts.
• Capital markets usually affected – M. Rothbard.
• Just like the Housing Bubble.
Stages of Production
Cons
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Provided by Ibtimes.com
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Collective Corruption
The Problems:• Fiat money produced by the government buys
friends.• When stimulus is spent they benefit the rich at the
expense of the poor. • The highest in power do not ask for a change
because they benefit greatly from the corruption.• The system will never change!
Economy goes into a recession followed by a stimulus.
Stimulus goes to the wealthy first, benefitting the people who made serious errors.
By the time it reaches the poor, they can’t use the money because prices have risen.
Definition:• “…the logical result of government
interventionism in the field of money production—can explain why public opinion accepts adherence to an economically and socially destructive fiat money regime” – T. Polleit (Fiat Money and Collective Corruption)
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vs
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. - F.A. Hayek
If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid. – J. M. Keynes
THANK YOU!
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Questions, Comments, Opinions?